Truist Financial Corp (TFC) 2015 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation second quarter 2015 earnings conference.

Currently, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

As a reminder, this event is being recorded.

It is now my pleasure to introduce your host, Alan Greer, of Investor Relations for BB&T Corporation.

Thank you, Tracy, and good morning everyone.

Thanks to all of our listeners for joining today.

We have with us Kelly King, our Chairman and Chief Executive Officer, and Daryl Bible, our Chief Financial Officer, who will review the results for the second quarter of 2015.

We also have other members of our executive management team, who are with us to participate in the Q&A session.

Chris Henson, our Chief Operating Officer, and Clarke Starnes, our Chief Risk Officer.

Ricky Brown, our Community Banking President, who is normally with us on these calls, is not available today.

He is having some shoulder surgery, so we wish Ricky well with that.

We will be referencing a slide presentation during our comments today.

A copy of the presentation, as well as our Earnings Release and supplemental financial information, are available on the BB&T website.

Before we begin, let me remind you that BB&T does not provide public earnings predictions or forecasts.

However, there may be statements made during the course of this call that express Management's intentions, beliefs or expectations.

BB&T's actual results may differ materially from those contemplated by these forward-looking statements.

I'll refer you to the forward-looking statements in our presentation and our SEC filings.

In addition, please note that our presentation includes certain non-GAAP disclosures.

Please refer to page 2 in the appendix of our presentation for the appropriate reconciliations to GAAP.

And now, I will turn it over to Kelly.

Thank you, Alan.

Good morning, everybody, and thanks for your continued interest in BB&T, and thanks for joining our call.

So we had a really solid quarter, and frankly with excellent strategic results.

Revenues were up linked and like quarters, and I might add in a relatively tough revenue environment.

Excellent credit quality, capital and liquidity, so overall, a very solid quarter.

Net income was $454 million in the second quarter.

Diluted EPS totaled $0.62.

But if you exclude the non-cash loss on American Coastal on the merger-related charges, it was $0.69.

Fee income ratio continued to improve to a very nice level of 46.3%, versus 45.8% in the first quarter of 2015.

And if you ex the American Coastal non-cash loss and [demurreds], our ROA was 1.17%.

ROE was 9.06%, and importantly, our return on tangible common equity was 14.05%.

From a revenue point of view, we were very pleased.

Our revenues totaled $2.4 billion, up $23 million or 3.9% annualized.

Revenue increased 1.3% versus second quarter 2014.

Had a lot of fee income positives, particularly in mortgage banking and investment banking.

Our fee income ratio continued to be strong, as I said, and we think that is a continuing positive for our Company.

In the lending area, average loans grew 3.9% versus the first quarter, but if you exclude our planned residential mortgage runoff, it was 7.8%, which was very good in this environment.

That area was led by C&I, direct retail, Sheffield and Regional Acceptance.

I'd say we had some very strong strategic developments during the quarter.

We did complete the sale of American Coastal, and significantly increased our ownership in AmRisc.

What it says basically, in concept, is it eliminates the small underwriting risk that we had in American Coastal.

We reinvested that in AmRisc, which increases our ownership in a really solid fee income business, so it's a net real positive, from a quality point of view.

We successfully closed and converted the Bank of Kentucky on June 19.

It's going great.

I was out there last week for a visit with -- spent the whole day with them.

Had breakfast with a group of tellers and assistants, and they were very excited.

Had a meeting with the senior leadership team, and then had a meeting with all of the Officers and Board members.

And I'll say, although very early, it's off to an extremely positive start.

And Northern Kentucky, greater Cincinnati market is going to be really fantastic for us.

Very excited about the fact that we got approval for Susquehanna, with a planned August 1 acquisition, and a conversion later in the fourth quarter.

This whole process is going very, very smoothly.

The receptivity in the markets has been great.

I was up in Lancaster last week.

Susquehanna was a key sponsor in the LPGA golf tournament, and so I had a chance to meet a lot of clients, lot of associates, and the attitudes were extremely positive.

This is a great Company.

You may have noticed they got number one in client service quality by JD Power in the mid-Atlantic region recently.

By the way, BB&T was the best.

It was number one of large banks in that area.

It's a huge opportunity for us, in really good markets.

These markets are a lot like the rest of our footprint.

Kind of a combination of some good, solid rural in the mid-part of the state, good medium-sized cities, just like we've always operated in, excellent large market in Philadelphia, excellent wealth opportunity, really strong core banking opportunity.

So it's going to be really, really good for us.

And don't forget, this is a really big scale opportunity for us with regard to expenses.

If you're following along on the deck, look at slide 4.

We always like to point out a few selected items that affect earnings.

So we did have a positive income tax adjustment of $0.15 on an after-tax basis.

We did extinguish about $1 billion of Federal Home Loan Bank debt, which had a $0.15 negative EPS impact.

So they just kind of washed out.

We did have a non-cash loss on the sale of American Coastal of $0.05.

And we had $0.02 in merger-related restructuring charges.

So the way I look at it, it was about $0.07 negative impact to recurring earnings.

If you'll follow along on slide 5, I'll give you a little more commentary with regard to the lending business.

C&I loan growth was very strong.

Average C&I loans were up $1.1 billion, or 10.6% annualized.

We had a strong growth in corporate lending, mortgage warehouse lending and government finance.

I will tell you that C&I lending is currently mostly in larger participations, and it's very competitive, since spreads are very tight.

Although I am proud of the fact that our spreads were basically flat, compared to the first quarter, which is a big achievement, given the environment.

We do currently expect C&I to continue to grow in low double-digit range in the second quarter, if you exclude our pending acquisitions of Susquehanna.

And after you include Susquehanna, C&I will likely exceed 30% annualized.

CRE and the construction and development area increased $33 million, or about 4.8% annualized.

End of period balances were up more than $200 million, but about 40% of that was from the acquisition of Bank of Kentucky.

Organic growth was strong, based on a very positive change, in that we had a material decrease in payoff activity that we saw last quarter.

We are seeing strong growth in fundings of multifamily construction and hospitality projects.

Spreads on C&I lending, in this case, actually improved during the second quarter, and our expectation is that C&I growth will be a bit stronger in the third quarter.

CRE income producing increased $50 million, or 1.9%.

This was strong growth in industrial, retail property segments.

And the period balance was up more than $400 million, but most of that was due to the Bank of Kentucky.

Market fundamentals generally are continuing to improve.

This is a really good market now.

Spreads continue to tighten, but on a net adjusted basis, risk adjusted basis, it's still very solid.

So looking next quarter, we expect C&I ITP to show strong growth, due to continued organic success, and the impact of a full quarter's Bank of Kentucky.

And remember, we'll have a partial quarter of Susquehanna.

If you look at average, the direct retail lending, it's a really, really strong story for us, a lot of work's been done on that in the last year-and-a-half, and it's really beginning to pay off.

We -- it increased $258 million, almost 13% annualized, primarily due to HELOCs and direct auto lending in the branches.

This is a sea change from the last 25 or 30 years.

We really began to make a lot of good auto loans in the branches, which is outstanding.

Wealth contribution to the direct retail lending continues here at record levels on a monthly basis, really good production from the community banks, so the wealth strategy just continues to be an outstanding success.

We're continuing to have significant momentum in direct retail lending in the third quarter, and we expect direct retail to grow at a faster pace.

Part of that's due to the full quarter's impact of Bank of Kentucky, but mostly because the strategy's just really working.

In average sales finance, which is largely prime auto lending for us, it grew modestly in the second quarter, slowing significantly from first quarter.

Because we're trying to be real careful, with regard to, frankly, pricing, and that market is extraordinarily competitive in the prime space.

Spreads are really, really thin, it's our lowest yielding asset, and we're really just turning it back, in terms of our volume expectations.

So unless the spread opportunities change, you would expect to see that decline for us.

But on a risk adjusted, capital adjusted basis, that's a net positive change.

Average residential mortgage loans were down $565 million, 7.4%, but remember, this is our plan of letting that run off, because we're essentially selling all conforming production.

Positive total originations in the quarter were $5.5 billion, up from $4 billion in the first quarter.

They were down modestly versus last quarter, but stronger than the second quarter of last year.

Gain on sales declined, due to slightly higher correspondent channel mix.

And so looking ahead, we continue to expect contraction in our resident portfolio, because we continued that strategy, and we think we will for some period of time.

So in the third quarter, absent the impact of Susquehanna, that will continue to climb.

If you include Susquehanna, residential mortgage will likely grow.

But remember, that's not a change in strategy; that's just bringing on the Susquehanna balances.

And other lending subsidiaries that grew $383 million, or 13.6%.

This was a strong seasonal quarter for us.

Strongest components were Sheffield, Grandbridge, AFCO/CAFO, which caused our insurance premium finance business, and Regional Acceptance.

Third quarter also will be seasonally strong.

That will drop off some in the fourth quarter, but we do expect third quarter to have double-digit growth in this category.

So to sum up, we expect average total loans and investments held to be an annualized 3% to 5% in the third quarter, on an organic basis.

Excluding residential mortgage, we would expect it to be 6% to 8%.

Obviously, if you include all the deals, we'll have growth that will be probably in the 30% range, and we would expect, at the end of the third quarter, the end of period loans to be $135 billion.

So if you'll turn to the next slide, we'll give you just a little bit of commentary with regard to deposits.

That story just continues to be outstanding, excellent deposit growth, really continue to improve deposit mix.

Overall, our non-interest bearing DDA grew 18.2%.

If you exclude our acquisitions, it's still a very strong 13.7%.

(inaudible) Business, public funds, all grew 12.8%, 15.3%, 8.8% respectively, versus the second quarter of 2014.

DDA deposit mix was a strong 31.5%, versus 28.3% in the second quarter of 2014.

And our cost of interest bearing deposits continues to come down steadily, to 0.24%.

So we made excellent progress, over the last couple of years, in that area.

So it's a solid quarter, as you can see.

We're very excited about growth opportunities and efficiency gains that we're going to experience heading into the next year.

Before I turn it to Daryl, I just want to emphasize, we are really focused on efficiencies.

The market's good.

We think it's growing at a solid 2% to 2.5% growth rate, which is better than most of the world, but it's not a really big, robust growth rate.

And so we believe, in that environment, that expense management continues to be extremely important.

We have laser focus on organic expense management, and we will absolutely gain efficiencies in expense management through the combination of Bank of Kentucky and Susquehanna.

Let me turn it to Daryl now to give you some more color on some other areas.

This morning, I'm going to talk about credit quality, net interest margin, fee income, non-interest expense, capital, our segment results, and the impact of acquisitions on our results.

Continuing on slide 7.

As Kelly said a few moments ago, we are very pleased to report a solid second quarter.

Credit quality was excellent.

Net charge-offs were 33 basis points, down 3%, a bit better than we expected.

Excluding regional acceptance, net charge-offs were only 20 basis points.

Loans past due increased 4%, due to seasonality and Regional Acceptance.

Going forward, we expect net charge-offs, including Susquehanna, to be between 35 and 45 basis points in the third quarter, assuming no material decline in the economy.

NPAs declined 5%, and commercial NPLs declined 12% from last quarter.

We expect MPA levels to remain stable, including acquisitions.

Turning to slide 8. Our allowance coverage remains very strong, increasing to 3.7 times, from 3.6 times net charge-offs last quarter.

The allowance includes the impact from the recent [SNC] exam.

We recorded a provision of $97 million for the quarter, compared to net charge-offs of $98 million.

Going forward, our provision will likely be driven by actual losses incurred and loan growth.

We currently expect third-quarter provision to increase $15 million to $30 million, to allow for the impact of the acquired portfolios and retail loan seasonality.

The fourth-quarter provision is expected to be $25 million to $40 million greater than the second quarter.

Continuing on slide 9. Net interest margin was 3.27%, down 6 basis points, and within guidance we provided you last quarter.

The decline resulted from runoff of acquired assets and lower yields on new loans and securities, offset by funding mix improvement.

Core margin was [3.16%], down 2 basis points.

Looking forward, including Susquehanna, we expect GAAP margin to increase about 4 to 6 basis points in both third and fourth quarters, resulting in a GAAP margin in the mid-3.30%s by year-end.

We expect core margin to remain relatively flat in the third and fourth quarters, unless interest rates start to rise.

Looking at our sensitivity table, we became slightly less asset sensitive in the second quarter, mostly due to the Federal Home Loan Bank terminations, and investment in deposit funding mix changes.

However, we will definitely benefit when the Fed starts to raise interest rates.

Turning to slide 10.

Our fee income producing businesses had a strong quarter, with fee income ratio increasing to 46.3%.

Total fee income was $1 billion, up $22 million compared to last quarter.

The change in fee income was mostly driven by these factors.

First, mortgage banking increased $20 million, mostly reflecting higher net MSR related income and higher commercial mortgage volume.

Second, investment banking and brokerage fees increased $14 million, mostly driven by higher capital markets activities.

This growth was offset by $18 million decline in insurance income, mostly due to the sale of American Coastal and a seasonal decline in employee benefit related revenues.

Finally, other income decreased $25 million, due to the loss on sale on American Coastal.

Looking forward, we will have a seasonal decline in insurance revenues in the third quarter, plus softer mortgage revenue.

We will gain a partial quarter benefit of $25 million to $30 million from Susquehanna.

But overall, fee income for the third quarter is expected to be flat to down 2%.

In the fourth quarter, fee income is expected to increase 3% to 5%, both versus second quarter.

Turning to slide 11.

Non-interest expenses increased, consistent with our guidance.

Personnel expense increased due to higher production related incentives, acquisitions, annual merit increases and higher equity based compensation for retirement eligible associates.

FTEs were up 489, mostly due to acquisitions.

Excluding the loss on debt restructuring and merger charges, expenses were up $47 million, driven by personnel related costs, which include new Texas and Kentucky branches.

Looking at taxes, our effective tax rate was 13.8%, due to the STARS recovery.

The adjusted tax rate was 32.2%.

Going forward, we expect our effective tax rate to be around 30%.

Excluding the loss on debt restructure and merger charges, we expect non-interest expense to increase 3% to 5%, due to the upcoming Susquehanna acquisition.

In the fourth quarter, we expect a 6% to 8% increase versus second quarter in non-interest expense, due to the full-quarter impact of Susquehanna.

Excluding merger related costs, our fourth-quarter core expenses are expected to be approximately $1.55 billion.

We also expect around $60 million to $80 million in merger charges for both third and fourth quarters.

We are very confident we will improve our efficiency and reduce these expenses.

We are already on our way to achieve our targeted savings for Susquehanna by the end of 2016.

At least 32% of their expense base will be driven out of the run rate.

Turning to slide 12.

Capital ratios remain very strong, with Basel III Common Equity Tier 1 capital at 10.4%.

Bank of Kentucky and AmRisc transactions used 18 basis points of our Common Equity Tier 1 capital.

Looking at liquidity, our LCR declined to 118%, due to increases in interest rates affecting mark-to-market on securities, nonoperating deposits and wholesale funding.

Our LCR was well above the minimum required 90%, which starts in 2016.

And our liquid asset buffer at the end of the quarter was strong, at 13.3%.

Looking briefly at our segments, starting on slide 13.

A community bank's net income was up $24 million from last quarter, driven by deposit growth and higher funding spreads on deposits, partially offset by lower interest rates on new loans.

Loan production was very good.

Commercial was up 10%, direct retail was up 35%, and revolving credit was up 22%.

The conversion of Bank of Kentucky was a big success, and we are preparing for third-quarter closing and fourth-quarter conversion of Susquehanna.

Turning to slide 14.

Residential mortgage net income totaled $72 million, up $8 million from the first quarter.

This was driven by higher loan production and an increase in net MSR income, and credit quality continues to remain strong.

Turning to slide 15.

Dealer financial services continues to generate strong loan growth, with average loans up 6% for dealer finance, excluding wholesale, and 10% for Regional Acceptance.

Dealer finance launched a flat fee dealer compensation program on July 1. This approach eliminates pricing discretion in the consumer transaction.

Asset quality indicators for dealer finance and Regional Acceptance continue to perform well within our risk appetite.

Regional Acceptance opened a new office in Kansas City.

An additional office in Northern Virginia is planned for later this year.

Turning to slide 16.

Specialized lending net income totaled $70 million, up $13 million from last quarter.

Drivers include strong loan production from commercial mortgage income, solid loan growth in small ticket and consumer loans from Sheffield, and strong production from mortgage warehouse.

Credit metrics remain strong, with charge-offs at 16 basis points.

Moving to slide 17.

Insurance services net income totaled $53 million, down $19 million from last quarter, mostly driven by a seasonal decrease in employee benefit insurance commissions, and the sale of American Coastal.

Year-to-date, new business growth was very healthy, at 14% for retail and 17% for wholesale.

Same-store sales achieved growth of 2%.

As a reminder, the AmRisc transaction eliminates our exposure to underwriting risk, and enhances our investment in high growth business.

Insurance services acquired Napco, a wholesale broker with commercial property catastrophe insurance coverage.

On slide 18, since last quarter, financial services generated significant corporate loan growth of 17%, and wealth experienced 30% loan growth.

June was a record month for wealth lending, in both dollars as well as units.

And corporate banking's average deposits grew 38% on an annualized basis.

Turning to slide 19.

Let me recap the impact of our acquisitions.

Including Susquehanna, we expect total loans of approximately $135 billion, and securities of approximately $43 billion, at the end of the quarter.

In terms of credit, we expect third-quarter provision increase of $15 million to $30 million, and a fourth-quarter provision increase of $25 million to $40 million.

These estimates are both compared to this quarter, and depend on loans losses and loan growth.

We will update these numbers post-acquisition, at our next investor conference.

Looking at net interest margin, we expect Susquehanna to result in an increase in GAAP margin of about 4 to 6 basis points, in both third and fourth quarters.

Fee income is expected to be flat to down 2% in the third quarter.

And the fourth-quarter fee income is expected to increase 3% to 5% versus second quarter 2015.

The impact of the AmRisc investment will reduce controlling -- will reduce non-controlling interest expense in the range of $5 million to $15 million per quarter, depending on seasonality.

Finally, looking at non-interest expense, excluding the loss on debt restructuring and merger charges, expenses are expected to increase 3% to 5% in the third quarter, and 6% to 8% in the fourth, both off of second quarter 2015.

We are on our way to achieving targeted savings for Susquehanna by the end of 2016.

At least 32% of their expense base will be driven out of the run rate.

In summary, we produced a solid quarter, including very strong loan growth, revenue growth and excellent credit quality.

We look forward to executing the opportunities with our merger partners in the coming quarters.

Now let me turn it back over to Kelly for closing remarks and Q&A.

Thanks, Daryl.

So just to hit a couple of points that Daryl made in summary.

I think it was a really solid performance organically.

As I said, we had excellent strategic execution, outstanding credit quality, capital and liquidity, positive revenue forecast, expense efficiency opportunity.

It's a tough environment, but overall, for BB&T, I'd say we're pretty excited about the future.

So let's go, Alan, to Q&A.

Thank you, Kelly.

Tracy, at this time, if you would come back on the call and explain how our participants can participate in the Q&A session.

Thank you.

(Operator Instructions)

We'll go first to Betsy Graseck with Morgan Stanley.

Hi.

Good morning.

Good morning.

Hey, Betsy.

Two questions on the acquisition.

One is -- and first of all, thanks for all the details, very helpful on slide 19.

The question is just on the timing of the cost saves.

I think on the merger and integration charges, you're pretty clear that those are going to peak in 4Q 2015.

How do you see the timing of the cost saves over the course of -- starting in a couple quarters, to 4Q 2016?

So Betsy, the cost saves -- because expenses go up in fourth quarter because we add those.

But actually, the cost saves will start occurring immediately, and will be pretty basically completed by the end of 2016.

Okay, but that should be like linear?

Or there's going to be a bump (multiple speakers)?

It will be a negative curvilinear.

Meaning it will come off faster early on, and then slower as you get toward the end of the year.

Okay.

And then pulling it all together, the accretion that you're looking for from the deal, is it still in that 2% to 3% range?

Yes.

Yes, we're still targeting 3% what we originally said.

And we'll just see, once we chose on Susquehanna, and see how we go forward, and see how the loan portfolio performs, and see how we can efficiently find ways to run the Company, we'll update you at future points.

I'm sorry, Betsy, based on what we know now versus what we knew when we announced the thing, and having spent a lot of time up there, I'd be marginally more positive than I was to start with.

This is just -- it's a really good Company, and they're great markets.

Their receptivity to our Company has been outstanding.

Cultural integration is going to be really smooth, so it's going to be a great merger.

Okay.

All right, so it sounds like 3% plus.

Okay, thank you.

And we'll take our next question from Ken Usdin from Jefferies.

Thanks a lot.

Daryl, just one follow-up on the balance sheet.

Thank you for giving us the period ends on the loans and the securities.

And I'm just wondering, is there any other mix shift changes that we should consider, when we're thinking about the size -- the total size of the balance sheet, going forward?

Are you mixing out of cash or any other assets?

Or is that going to be a pretty good read on where the earning assets should be?

I think the earning assets should pretty much be what we told you.

On the liability side, we are extinguishing their Federal Home Loan Bank advances, and you'll see us starting to call some of their trust preferred and other sub-debt obligations, as we're allowed to get those called.

So those will come off the balance sheet to help with [run rate].

Okay, so does that get us in the 180 range on earning assets?

Yes, that would be correct.

I think that's right.

Okay.

Great.

Second question, just on fee income, there's always a couple moving parts, and especially this quarter with the insurance side.

So can you give us an update on how much that's influencing the fee guide here, in terms of the seasonality, the loss of the -- the absence of the sold revenues?

And what you're looking for in that part of the business [goal], looking ahead?

Right, Ken, this is Chris Henson.

I'll be happy to do that.

It is a bit confusing.

I think -- last time, I think I mentioned we would be up about 3.3%.

We did not, at that time, have approval to move forward with American Coastal.

So that happened subsequent to that guidance.

So in fact, what happened -- what you should look for in third quarter, is you would see fee income and insurance drop in the 13%, 14% range.

About 10% of that would be tagged to the loss of American Coastal.

The balance would be seasonal.

And then from there, you should see fourth quarter moving up in the 7.5% to 8.5% range, to finish out the year.

So you'll have overall loss of revenue due to American Coastal in 2015, would be in the $90 million, $92 million kind of range.

So what you ended up with is seasonality.

It does introduce just a bit more seasonality into the picture.

So on a go-forward basis, if you were to rerun this over 2015's numbers, and assuming the deal happened first quarter, comparing it with the deal, without a deal, look at pure seasonality, first and second quarter are going to be relatively flat.

Maybe 1% or so different.

And then typical seasonality, on a go-forward basis, you're going to be down in the third -- in the 8.5% kind of range, and you should be up in the fourth, 5.5%, 6.5% kind of range, something like that.

So seasonality in insurance will be relatively flat with first, a little stronger in first and second, then it falls in third, and then fourth quarter will be back up.

Okay.

Got it.

Okay.

We'll go next to Gerard Cassidy with RBC.

Gerard?

Can you hear me now?

Good morning.

Thank you.

Kelly, can you maybe give us some thoughts on your outlook?

Obviously, you have two successful deals here, particularly the Susquehanna deal, which was a good sized one.

What your view is on M&A, for maybe next year?

Especially in light of the fact that some of your bigger competitors seem to be getting their internal systems up to a level that I think is acceptable to their regulators, to maybe allow them to start to do bigger deals in the second half of next year, and into 2017.

So maybe give us how you see the landscape developing over the next 12 to 18 months?

Yes, Gerard.

We've said for some time now that, of course, our M&A strategy is a supplement to our organic growth strategy.

It remains so.

I've consistently said we would like to do 5% to 10% of our asset size in good-quality acquisitions.

We did that this year, with Bank of Kentucky and Susquehanna.

So that's $10 billion to $20 billion in a year.

I feel confident in that same category range for next year.

There are a number of institutions, let's just say in the $5 billion to $20 billion range, that I think are considering their strategic opportunities, and may present some availabilities.

The fact that there may be some other competitors out there, to me, is not something I spend a lot of time worrying about.

The partners that we talk to are ones that we've known a long time, and our cultures are very, very similar.

Our strategies are similar.

And so I think that -- I mean, there's some great other competitors out there, in terms of acquiring companies, and we won't get them all.

We don't want them all.

So I think there's a very high probability of us being able to do what we like to do.

And as a follow-up, Daryl, any commentary on -- you've obviously converted to a single general ledger.

Did you -- and I know Bank of Kentucky was a small deal.

Susquehanna will be a better test for you folks on the integration.

Is there a possibility you could get better expense savings, because of better execution, due to the newer systems you have?

I would say that the newer systems, while down the road could give us some expense savings, we're still trying to get all the general ledger to be connected to the SAP system.

There's other pieces that's we're adding onto it this year and into next year.

I would say that just, it's opportunities, but it won't be right away.

So Gerard, the way this works, it won't be specifically around acquisitions.

The way the efficiencies in this system comes is when you really put all the tentacles out of the GL out through all the other disparate systems, and when you're drawing information into the GL for CCAR purposes, and other day-to-day management purposes, the whole flow of information becomes much more seamless and efficient.

So it's not specific.

Now, that does mean, when you do an acquisition, you are more efficient.

But as Daryl said, we're continuing to build that out, and it will take a little while before we get to the optimum state.

But it's definitely a long-term efficiency improvement.

Great.

Thank you.

We'll take our next question from John Pancari from Evercore ISI.

Good morning.

Good morning.

Good morning.

Regarding the margin outlook, I know you had indicated stable for the core margin in the third quarter.

That implies, I guess, that Susquehanna has no real benefit to the margin, despite having a somewhat higher margin, I guess.

So is that the case?

And -- or is there any other factor impacting that?

John, when we bring Susquehanna in, we're going to basically mark-to-market their balance sheet.

So in essence, their loans and their deposits will come over to our Company.

Our best guess is, core remains stable.

And then when interest rates start to rise, when the Fed starts raising rates, then our core will get some expansion.

We do get GAAP accretion from purchase accounting with Susquehanna.

That's in the neighborhood of, over two quarters, that would be 8 to 12 basis points.

Right.

Okay.

But the core doesn't benefit much?

Not until, really, the Fed starts raising rates.

Yes, okay.

And then separately, also on Susquehanna.

Can you just give us your updated thoughts on the plans for the Hann auto lease subsidiary?

I know that was on the table, about what you'd do with that.

And then secondly, on Susquehanna, I just want to see if you could talk a little about revenue enhancement opportunity?

Not that we're out here trying to model that out.

But it just seems like, given their product breadth versus what BB&T brings, that there could really be opportunity to drive upside to that 3% accretion, from the revenue side.

John, this is Clarke Starnes.

I'll take the Hann question.

We're working very closely with our partners at Susquehanna to evaluate how we integrate that platform, and how we think about it going forward.

We're fairly large in the sales finance business, so we believe the merger gives us an excellent opportunity in the Northeast, in the Pennsylvania and New Jersey markets.

And so certainly, Hann, and the platform they have there around sales finance, will be a benefit for us.

But we're still evaluating what our appetite is for the leasing -- the consumer leasing component of that.

And we'll make those plans as soon as we can, subsequent to the purchase.

John, this one point, John, and then Chris will take a point.

On revenue, they have a really good, solid retail strategy, so we won't change that dramatically, frankly.

But the two big areas where there will be huge lift.

One is in corporate, where we have a broader corporate range of products, and just a larger size.

We can just do larger deals that they couldn't do.

And then others, as well, which Chris will talk about.

Yes, John, there's two I would focus on, insurance and wealth.

They have a retail insurance franchise, called Addis Insurance.

And so we'll be converting that over in the early fall.

And that will give us a good beachhead start that we typically don't get in these type of acquisitions, and then we will look to acquire our way in and around their footprint.

So we clearly have upside revenue there.

Timing is uncertain.

We're already beginning to talk to potential opportunities over there.

Secondly, we have a really nice opportunity in wealth.

They had two subs.

One's Valley Forge, that will plug into our wealth and trust business.

And we will bring all of our products to them, to be able to deliver to their client, which I think is very helpful.

And then they have a business called Stratton Management, that is asset management.

We will plug that into our Sterling Capital Business.

And we think there are a lot of opportunity, again, to provide more distribution, through our Company, to help them move more product.

So there are a couple additional good opportunities, we believe.

Okay.

Great.

Thank you.

We'll go next to Stephen Scouten with Sandler O'Neill.

How you doing this morning?

Question for you about the insurance fees, and just the guidance moving forward there, specifically with American Coastal and AmRisc.

If I'm understanding the guidance there, about the loss of revenues and the potential benefit, is that like a net negative to overall insurance or overall revenues by about $60 million a year?

Does that sound about right?

It's actually going to be -- it actually could be a bit more than that.

Let me, if I could, just step back again and speak to the concept of why we did this, because I think it's pretty important.

You had two businesses.

One American Coastal, which we disposed of, we owned 100% of, and then AmRisc, which is a faster growing business, we owned just a little less than half, but had control.

So given we had control, we already have consolidated 100% of their numbers into ours.

So you won't see a move-up at the top line from AmRisc.

What you will see, to Daryl's earlier point, is you'll see a reduction in controlling interest, which thereby means we will record more profitability out of that business by a like amount.

So don't expect to see any improvement or increase in revenues as a result of AmRisc, although it is a higher margin business, and is a faster growing business.

And it is critical to the long-term piece of our enterprise, because it interacts directly with our wholesale business, and we're the second largest wholesaler in the country.

So it was integral for the long-term franchise to retain it, unlike an underwriting business that frankly is nice to have, but it just presented risk.

The other benefit -- that's the other benefit of moving Am Coastal out is, it reduces risk.

So to answer your question, it's actually about $140 million revenue company that would come out, in terms of Am Coastal.

And all I was saying earlier is that, in last quarter's guidance, we did not know when it was going to close.

So we actually closed it June 1, and so we had about $11 million in loss of revenue this quarter.

And then it will drop in the third quarter, we think about -- total revenue, about 13% or so, and about 10% of that would be Am Coastal.

Thereafter, fourth quarter would pop back up in the 7.5% to 8.5% range.

Steve, the other thing to remember is that the whole business is gone.

So it's not just revenue that's going away, it's expenses.

It's earnings.

So I think short-term, it might be dilutive $0.01 or so.

But long-term, AmRisc was growing a lot faster.

American Coastal was more of a stable cash cow company.

So we think over the next couple of years, we'll actually turn from being slightly dilutive to being accretive.

So how we see it -- that's exactly right.

We see it being dilutive $0.01 year one, roughly flattish year two, and then growing thereafter.

Because keep in mind, it's directly tied to the second largest wholesaler in the country.

So very critical, long term.

Okay, that's great.

I appreciate that color.

And then one other question, about the capital deployment timeline.

Are there any changes to that?

Are you still expecting to start implementing the buyback in 3Q?

Or would there be changes to that, still, on the potential announcement of incremental M&A?

So Stephen, remember that we said consistently that our strategy, with regard to capital deployment, is organic growth, dividends, M&A, and then a distant fourth, buyback.

We did have a request in, and it was approved for about $820 million or so of buyback and/or alternative uses of capital, in our CCAR plan.

We did recently have the Board approve 50 million shares for that, so we'd have it functionally approved.

But we actually consider whether we do buybacks on a day-to-day kind of basis, based on our projection of acquisition opportunities.

And frankly, the price of our stock, and internal rate of return, in terms of acquiring stock back.

So we can't tell you what that decision will be.

It will be a decision we'll be making on a real time basis, based on opportunities that present themselves.

Okay.

So the implication there would be, if you're not buying back stock aggressively toward that $820 million in, say, 3Q, then the likelihood of M&A is probably higher.

Is that fair to say?

That would be a rational induction.

Great.

Thanks for taking my questions, guys.

We'll take the next question from Geoffrey Elliott from Autonomous.

Hello, there.

I've got a question on the expense side.

Could you give a bit more color on the 7% increase in personnel expense, year on year?

And just how we reconcile that with the overall decline in average employees over the period?

So if you look at the expenses, we noted in our deck that expenses were up, due to our higher fee businesses, which tend to pay out higher incentives.

So that would be in mortgage, Grandbridge, and investment banking.

So that's a big driver.

On a year-over-year basis, merits kind of wash each other out.

We did have higher costs in our healthcare oriented, and if you look at pension on a year-over-year basis, that's higher.

So those are probably the main drivers.

We also have Citi and Bank of Kentucky that came in.

Those actually are adding not just FTEs there, but they do have other run rate expenses.

When I look at the delta, I looked at it more on a linked quarter than on a year-over-year quarter.

But on a linked quarter, it's about $9 million higher.

But absolutely, in the second quarter, it's about $12 million, just Bank of Kentucky and Citi so far, that cost us more expenses in the second quarter, before we start getting cost savings from Bank of Kentucky.

Thank you.

We'll go next to Paul Miller with FBR Capital Markets.

Yes, thank you very much, guys.

On the Federal Home Loan Bank borrowing extinguishment, does that clear out all your federal loan bank borrowings?

Is there other opportunities to lower your borrowing costs by getting rid of some more of this stuff, down the road?

Paul, we still have a little over $2 billion of what I would call long-term federal home bank advances that have an average cost of over 4.5%.

Right now, the plan is to keep those on the books, unless we have other opportunities to offset that.

But I think you saw us do a debt issuance, as well.

So we're still keeping the long fixed rate, but we repriced the long-term debt down well over 200 basis points.

And then the other question -- and you talked about this in the opening comments, about the competitiveness of lending out there, or whatnot.

And we've seen some of your competitors talk about, the middle market commercial businesses are being really over-banked out there.

Can you add some color?

Are you seeing the same stuff in the middle market?

And how do you define middle market at BB&T?

Paul, this is Clarke.

We define middle market, generally companies with revenues up to about $0.5 billion or so.

Everyone has it differently.

So we're probably on more the lower end of the middle market, is where we play most prominently.

And certainly in that space, as well as the larger end in the shared credit space, is extremely competitive.

My personal opinion is, some of the leveraged lending guidance and pushdown around -- or limits around that is pushing the whole market more toward the middle market space.

So there's even more effort to bank those clients, and I think it's highly competitive.

And as Kelly said, though, we're doing really well there, and we've done an excellent job, particularly in the last quarter or two, in maintaining our spreads in a very, very difficult environment.

Thank you very much, gentlemen.

(Operator Instructions)

And we'll go next to Vivek Juneja from JPMorgan.

Hi.

Couple of questions.

One is, I want to confirm the 3% accretion from Susquehanna, that already includes some revenue enhancement, right?

I would say it was really driven more by cost saves.

We do have fee income increasing over a five-year time period.

But I would say the accretion out of the blocks, in the first year or two, is really more driven by cost saves, Vivek.

And then over time, as Ricky does his thing in community bank, and starts to get it to perform to BB&T standards, then we really get higher lift in lending, as well as in our fee income areas.

Okay.

Second thing.

The efficiency ratio, can you talk a little bit about why it's up linked quarter?

And when I look at the efficiency ratio versus where it was in the fourth quarter, it's been a big jump.

It's up, I think, looking at your own calculations on the -- adjusted for nonrecurring, it's up 300, 400 basis points.

That's a big change.

Can you walk through why it's gone up this quarter, linked quarter, and what's the plan for that?

So Vivek, we said at the beginning of the year that we are not going to be spending as much time talking about pure efficiency ratio, just because, as you pointed out, it's a numerated and denominated kind of question.

And when you get so tightly focused on that one number, it gets to be misleading oftentimes, because it moves up or down based on what happens to the expenses and/or the revenues.

So generally right now, though, what's happening to us is that our expenses are elevated, as we've talked about all along, in terms of our systems investments, risk management investments, and some pre-investments, with regard to some of the M&A activity.

So all of that is driving some of your expenses up.

And so what we think now, in terms of the general level of efficiency ratio, given what I said in terms of the inability to be real precise about it, is that it's peaked.

And we think, as we head through next year, it will be slowly coming down.

We still have an intermediate-term target of 55%.

And we feel confident we'll be heading more in that direction, as we head towards the end of next year.

Okay.

All right.

And one last thing.

So going back to acquisitions versus buybacks, it sounds like you're ready to do -- look at further deals, Kelly, right away.

Is that -- is there a plan to just -- if you have to hold off buybacks for a quarter or two, until you figure that out?

Or is that -- or is the approval based on a per-quarter basis, what you're supposed to get done?

The approval is basically based on how you earn the capital.

So it does spread on a linear basis, over the course of the year.

But we have availability in the current quarter or two to do buybacks if we choose to.

And as I said earlier, it's a function of our expectations around investment opportunities and our evaluation of our price relative to the return we would get, in terms of acquiring our own stock.

So you're not going to be able to judge precisely exactly what we'll be able to do with that, because we're not going to tell you exactly.

We don't know exactly.

It moves along.

So what we really have to do is to judge the probabilities of investment opportunities, and that's not a science.

It's more of an art.

So as I said, I'm optimistic, over the next 12 months or so, we'll have additional investment opportunities.

Whether or not they coincide in a time frame, such that it would preclude us doing buybacks or not is -- we're unable to tell at this point.

Okay.

Thank you.

We'll take our next question from Terry McEvoy from Stephens Inc.

Thanks, good morning.

Daryl, I was wondering if you could talk about your thoughts on purchase accounting accretion in 2016?

Specifically, when does it peak?

Is it earlier in the year?

And then what type of runoff or decline are you thinking about, as the year progresses?

For Susquehanna -- Bank of Kentucky really doesn't have a huge amount of purchase accounting, so I'll just deal with mainly Susquehanna.

I would say that, with the credit mark that we have, which is about 4.5%, there will be approximately a little under $600 million of accretable purchase accounting income that basically goes through net interest income, over the life of the assets.

At the same time, though, we will have more loans that we take losses on, and those loans will increase provision.

And the timing won't necessarily match up.

It's too early to say what the losses will be in the Susquehanna portfolio.

But know that we pretty much locked down the $580 million over the life of the assets, so call that five-plus years.

But it would be more earlier on, and then it would tail off towards the end of the five-year period.

And the losses could be sporadic over that same time period.

The other thing to note is, the portfolio Susquehanna has, we're putting it on the books, doesn't have an allowance to it.

As new volume comes on from Susquehanna, we have to provide for an allowance there.

So that's why we are talking about potential growth impact, also, of that portfolio on the provision.

Thanks.

And then as a follow-up, service charges down 2.5% year over year.

How much of that is a function of consumer behavior versus any specific actions you've taken internally?

And as you look ahead, anything to make you optimistic that line of business will stabilize?

And as it relates to Susquehanna, are there practices, as it relates to these types of fees, consistent with BB&T's?

Yes, this is Chris.

I think it is largely consumer behavior.

Clients have more access to information, technologically, and they're overdrawing less.

And --

We have higher deposit balances, so our clients are carrying larger balances now on hand, which just means they pay less in fees, and just more with compensating balances.

Thank you.

We'll take our next question from Nancy Bush from NAB Research.

Good morning.

Hey, Nancy.

Hey.

Kelly, we've had some mixed commentary on the economic outlook in the past couple of days.

Richard Davis, who had been a bear on the economy, came out and made some very strongly positive statements yesterday.

But we've had some other companies that were a little bit more subdued.

Would you just give us your outlook?

And particularly with regard to the Southeast?

Yes, Nancy, I suppose between some of the commentary you heard, I would be where I have been, which is in the middle of the road.

I think the economy is in a really solid 2% to 5% -- I mean 2% to 2.5% real GDP growth.

I see very little risk of any downside on that.

I see very little opportunity for it being substantially better than that, until we get closer to the 2016 election.

No if you get some real positive leadership intonations out of DC, then there is some upside opportunity.

But for the next 12 months, I think you can be pretty solidly focused on 2% to 2.5%, which is actually pretty good.

Because you know, that's nominal at about 4.5% or 5%, in terms of the nation as a whole.

I think the Southeast, Nancy, can probably beat that a tad.

Because as you know, as you and I have talked about over the years, the Southeast clearly took it on the chin.

But -- and everything got devalued.

But it has been -- values have been reset.

Activity flows are moving.

Florida's back to growing 800 people a day, including Texas, 1,000 people a day.

But Atlanta's turned, finally, and the coastal markets of North Carolina have turned.

So I'd say the Southeast will be net positive to the national growth rate.

Not dramatically, but if the national is, say, 2.5%, I wouldn't be a bit surprised to see the Southeast at 3.5%.

Okay.

And ancillary to that, your -- the outlook for the mortgage business, how do you see your mortgage banking activities proceeding over time here?

Are we in a last great wave of purchase activity?

Or how do you see BB&T proceeding in that business over the next couple of years?

I think it will be steady to slightly up.

The refinance, it is the last of that, I think, as of some dramatic international events.

But look, purchase activity is really picking up.

New home construction is up substantially; new home purchases is up.

We're seeing a shift toward higher percentage of purchases versus re-fis.

So I think you can think about it in terms of being steady to up -- not dramatic up, but steady to up.

Okay.

All right.

Thank you very much.

You bet.

We are out of time for questions.

So this concludes today's question-and-answer session.

I would like to turn the call back to Mr. Alan Greer for any closing or additional remarks.

Okay.

Thank you, Tracy.

And thanks again to everybody for joining us today.

If you have further questions, please don't hesitate to contact Tamera or myself in Investor Relations.

Thank you, and we hope you have a great day.

This does conclude today's conference.

We thank you for your participation.